The GDP measures the market value of all final goods and services produced within an economy in a given period.

GDP only measures current production. Transfer payments and transactions involving goods produced in other periods are not included in the calculation of GDP.

GDP is usually expressed in the currency of a particular country, e.g., Philippine peso.indicates the market value of the goods and services

13Definition of GDP

The market value of good i (Vi) is equal to Pi?Qi

GDP sum of the market values of all final goods and services produced within the year.

14GDP includes final goods and services only

Final goods - goods and services that are not purchased for the purpose of producing other goods and services or for resale

Eg. Rice (final) and palay or unhusked rice (intermediate product)

Including intermediate goods and final goods will result in double counting.

153 Approaches for measuring GDP

Expenditure Approach (upper loop) measures GDP as the sum of expenditures on final goods and services.

Income Approach (lower loop) measures GDP as the sum of incomes of factors of production (wages, rent, interest and profit.

Value-added Approach measures GDP as the sum of value added at each stage of production (from initial to final stage)

16Expenditure Approach

Uses the upper loop of the circular flow diagram.

Example Suppose the economy has only one product, namely, rice.

17Income Approach

Uses the lower loop of the circular flow diagram sum of payments to the various factors of production.

Suppose that in the production of rice the sales and expenses are as follows

18Value Added Approach

Suppose that rice is the only final product of an economy It goes through several (3) stages of production.

19Notes of the 3 approaches

The expenditure approach, income approach, and the value-added approach all come up with the same estimate of the GDP. They are equivalent approaches.

In the income approach, profit is also considered a payment to the entrepreneur. So the incomes are (1) wages, (2) rent, (3) interest, and (4) profit. Profit adjusts to make the sum equal to the final value of the good.

In the value added approach, only the value added in each stage of production are included. If we add the value of intermediate product with the value of the final product, we commit the sin of double-counting.

At each stage of production, the value-added is equal to wages, interest, rent, and profit. Therefore the value of the final product is likewise the same of all payments to the factors of production.

20Additional Topics

GDP vs GNP

Real vs current GDP

Inter-country comparisons of GDP

Convert to international currency like US dollars

Convert to per capita measures

21THE NATIONAL ACCOUNTS OF THE PHILIPPINES

same principles as above but need to make adjustments in order to accommodate the realities in modern economies

Expenditure approach

GDP C G I X M SD

22Table. Expenditures on GDP, 2002 in million pesos. 23Expenditure Approach

C - spending of households and private non-profit institutions on goods and services

Non-durables - goods and services that are consumed rapidly

Durable goods - that last for a longer period of time

I - investment spending of domestic agents. Its major components are changes in Fixed Capital and Changes in Stocks

G - governments payments for the salaries of its workforce as well as purchases of goods and services ? used for the governments day to day operations and projects.

X - the spending of the rest of the world on goods and non-factor services produced in the country

M - the countrys purchases of goods and non-factor services from the rest of the world.

SD - accounts for accounting and reporting errors in the accounts. Needed to ensure that GDP value from all approaches are the same

24Income Approach 25Income Approach

GDP COE NOS D IBTS

In a simple world, GDP COE NOS. In practice, require two adjustments (D and IBTS)

D - accounts for the wear and tear of physical capital

D is treated as a business cost ? not included in NOS. However, D is part of I in the expenditure side of the national accounts

IBTS - includes taxes on the use or purchase goods and services and grants from government to firms. E. g sales taxes, value added tax

Not included in NOS but is part of the market prices, of which the items in the expenditure accounts are quoted

26Value added or Industrial Origin approach

GDP value added of different activities (sectors)

27The distinction between GDP and GNP

GNP GDP Net Factor Income from the Rest of the World (NFIRW)

NFIRW - measures the difference between the earnings of Philippine residents in other countries and foreign residents in the Philippines

28The distinction between GDP and GNP 29Nominal and Real GDP

GDP at current prices or nominal GDP - GDP measured using the prices of the year for which it is calculated

Nominal GDP can be a misleading indicator of changes in output or income because it also embodies changes in the prices of goods and services.

Real GDP or GDP at constant prices ? measures the total value of output using the prices of a selected year (the base year).

Real GDP better for analysis overtime because it eliminates the effects of price changes

30Table 8.5 31

GDPyear 1 (100) (50) (100) (100) 15,000

GDPyear 2 (100) (50) (100) (100) 15,000

In practice, calculating real GDP using the previous approach is a tedious process because there are so many goods and services are produced in an economy. Can simplify the calculation process by using the GDP deflator.

GDP deflator - a price index that allows us to convert nominal GDP into real GDP. (note price index to be defined later)

Measures how much output or income was produced or received, on the average, by an individual in an economy

Useful for comparing the performance of a country overtime and a countrys performance relative to its neighbors

40Population growth is quite high, about about 3 per year in 1980s and 2.3 per year nowadays. 41Per capita GDP 42Modest and erratic growth in GDP plus high population growth means the per capita GDP growth is low. 43TABLE 8.7. Selected output Indicators for the Philippines, selected yearsSource NSCB (1998), Philippine Statistical Yearbook. 44GNP for cross country comparisons

Convert a countrys GNP to US dollars, or some common currency, by using the countrys exchange rate

When comparing income across countries, it also makes sense to use per capita estimates ? eliminates differences in population size. E.g. (data is for 1998)

45PPP Adjusted GNP

PPP purchasing power parity

GNP is adjusted to account for the fact that 1 USD when spent in one country does not buy the same quantity of goods when spent in another country

Does not include activities that do not go through the formal markets sectors

Does not include illegal activities like drug trafficking, prostitution, moonlighting

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